M&S cost savings to spur mastertrust copycats

Marks & Spencer has announced it will enrol 25,000 staff into a new mastertrust structure next November as one of the first 13 companies to be impacted by auto-enrolment legislation.

A number of companies are set to follow the retailer’s lead as a way of reducing the administration costs associated with auto-enrolment, but also offering members more investment choice than the National Employment Savings Trust (Nest).

But schemes have been warned leaving planning for auto-enrolment to the last minute could lead to substantially higher costs. There have also been concerns raised over the potential for conflicts of interest to exist in mastertrusts.

M&S is the first client of Legal & General’s new mastertrust, called WorkSave Pensions Trust, which has been developed as competition to Nest.

Other retailers – such as Dixons, John Lewis and Mothercare – are also actively exploring mastertrusts for auto-enrolment, with Standard Life believed to be the next insurer planning to launch such a product.

The mastertrust structure allows multiple schemes – often from different employers – to operate independently under the same governance framework.

Individual schemes are able to make their own decisions over factors such as investment funds and contribution rates. But they are able to benefit from economies of scale when it comes to administration and investment costs.

“Like most major employers, auto-enrolment will mean a significant increase in members of our pension scheme, as despite our best efforts to promote the scheme, there’s still a proportion of employees who don’t save,” said Julie Parker-Welch, pensions reward manager at M&S.

“When it comes to pensions, retail is a pretty complex sector – with multiple sites and higher employee turnover rates.

“Though M&S benefits from lower than average employee turnover, it was clear from our review that we needed a new pension solution to help us successfully implement the legislation and retain a market-leading DC [defined contribution] pension scheme.”

A spokesperson for M&S said the mastertrust structure was favoured as it reduced the administrative costs of running a legacy DC scheme.

“The main benefit for us of going into a mastertrust rather than Nest is it allows us to transfer our existing members in the structure, which Nest wouldn’t have allowed us to do,” she said.

“It is important for us not to have a legacy scheme, but to have all the DC members in one place.”

In a report into the impact of auto-enrolment on pension schemes, Hymans Robertson argued the best structure to cope with the incoming legislation was a mastertrust.

The consultant said it was a better scheme design than an unbundled trust, bundled trust, contract-based structure and Nest.

This was due to its advantages in the following areas:

• low administration costs;

• scalable administration;

• ability to be tailored by the employer;

• the ease of dealing with deferred members; and

• ability to recoup short-service refunds.

“Auto-enrolment is only a year away for the largest companies and M&S has been on the front foot with its planning,” said Lee Hollingworth, head of DC at Hymans Robertson and lead consultant to M&S.

“Working with us since August 2010, M&S has ensured sufficient time to review its existing arrangements, as well as plan and design a scheme that is right for the business and its employees.”

But he added: “Unfortunately, our research suggests many other companies are at risk of being under prepared for the impending legislation changes. Leaving preparations to the last minute can result in significantly higher costs and, regrettably, a poor experience for employees.”

Many multi-employer schemes have been launched in recent years, but the total membership is believed to be only about 300,000 individuals.

A Pensions Regulator discussion paper into achieving good member outcomes in DC schemes, published earlier this year, noted the advantages of mastertrust arrangements in achieving economies of scale and providing governance expertise.

But it also noted a number of potential problems arising from conflicts of interest if trustees were employed by the provider of the scheme.

“A feature of some of the multi-employer occupational pension schemes with non-associated employers that we have seen is that the employers are not engaged in the ongoing operation of the scheme,” it said.

“In addition, the trustees may be appointed and employed by the provider so may find it difficult to identify their fiduciary duty to members separately from their duties to their employer.”

It added: “This presents a potential risk to good member outcomes.”

The M&S spokesperson said this was not a major concern as the company had a governance committee in place, which had employee-representatives on it. She said this would work to protect member outcomes.

The paper also noted many mastertrusts which had been created were not yet large enough to achieve substantial economies of scale.